What Is Estate Planning?

Estate planning determines how your assets are managed and distributed after you pass away or in the event you become incapacitated. It is a crucial part of retirement planning and ensures your final wishes are carried out.

Rachel Christian, writer and researcher for RetireGuide
  • Written by
    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.

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  • Edited By
    Lee Williams
    Lee Williams, senior editor for RetireGuide.com

    Lee Williams

    Senior Financial Editor

    Lee Williams is a professional writer, editor and content strategist with 10 years of professional experience working for global and nationally recognized brands. He has contributed to Forbes, The Huffington Post, SUCCESS Magazine, AskMen.com, Electric Literature and The Wall Street Journal. His career also includes ghostwriting for Fortune 500 CEOs and published authors.

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  • Reviewed By
    Ebony J. Howard, CPA
    Ebony J. Howard, CPA

    Ebony J. Howard, CPA

    Credentialed Tax Expert at Intuit

    Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation.  She specializes in analyzing financial information in the health care, banking and real estate sectors.

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  • Published: September 14, 2020
  • Updated: July 22, 2022
  • 5 min read time
  • This page features 9 Cited Research Articles
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APA Christian, R. (2022, July 22). What Is Estate Planning? RetireGuide.com. Retrieved September 27, 2022, from https://www.retireguide.com/retirement-planning/estate-planning/

MLA Christian, Rachel. "What Is Estate Planning?" RetireGuide.com, 22 Jul 2022, https://www.retireguide.com/retirement-planning/estate-planning/.

Chicago Christian, Rachel. "What Is Estate Planning?" RetireGuide.com. Last modified July 22, 2022. https://www.retireguide.com/retirement-planning/estate-planning/.

Estate Planning Basics

Estate planning is the process of deciding what happens to your money, belongings, property and other assets after you die.

It can also appoint someone to make critical health care and financial decisions on your behalf if you become incapacitated.

Creating a will is the most important part of estate planning, but other documents are also involved.

Estate planning documents:

An estate plan takes inventory of all your assets, which can include cash, property, cars, collectibles, stocks, life insurance policies and other investments.

You may be able to create certain estate planning documents on your own. But most experts, including the American Bar Association, strongly recommend hiring a professional to help you get your affairs in order.

A good estate plan should:
  • Limit estate taxes.
  • Name beneficiaries to inherit assets.
  • Assign a guardian for your minor children.
  • Name an executor to oversee the terms of the will and guide it through probate.
  • Name or update beneficiaries on life insurance policies and retirement accounts.
  • Set up funeral arrangements.
  • Appoint someone to manage your affairs if you become incapacitated.
  • Describe the end-of-life health care you want — or don’t want — to receive.

Writing a Will

A will is the basic building block of estate planning. It is a legally binding document that outlines who receives your assets after you die. It also appoints guardians for your minor children.

This document, also known as a last will and testament, ensures your wishes are carried out. It appoints an executor, or a trusted person who can carry out the terms of the will and guide it through probate.

Probate is a court-supervised procedure that proves the authenticity and validity of your will. It is the first step taken to distribute your assets to named beneficiaries. Probate is also the legal forum where interested parties can contest a will.

Some assets — such as life insurance policies or retirement accounts with a named beneficiary — can pass to heirs outside of probate.

Without a valid will, the state determines where your belongings go and who receives them. This is known as dying intestate.

In this scenario, assets are generally split evenly among your next of kin, starting with your spouse, then children, parents, siblings and so on.

Even if you had no real relationship with your closest legal relatives, your beneficiaries won’t be able to change how your assets are distributed if you die without a valid will.

Did You Know?
Less than one-third, or 32 percent, of surveyed Americans said they had one or more estate planning documents at the beginning of 2020.
Source: Caring.com
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Planning for Estate Taxes

Anticipating and minimizing taxes is crucial for people with large estates.

Estate tax is only triggered at the federal level if your total assets exceed $11.58 million in 2020. Tax is levied on the portion of an estate that exceeds this exclusion limit.

Spouses are almost always exempt from estate tax through a process known as unlimited marital deduction.

However, your estate may still trigger taxation at the state level. At least 12 states and the District of Columbia leverage their own estate tax.

States establish much lower asset thresholds than the federal government. They range between $1 million and $5.7 million.

But assets over the exclusion limit are taxed at a much lower rate at the state level. For example, federal estate tax is around 40 percent while states often average between 8 and 18 percent.

Six states also levy inheritance tax. These taxes apply to assets after they have been inherited and are paid for by the heir.

There is no federal inheritance tax.

Specific strategies can help reduce estate and inheritance taxes.

However, if you own a multimillion-dollar estate, things can get complicated. Consult an estate planning lawyer or professional financial planner who can guide you through the process.

Ways to avoid death taxes:
  • Spend your assets before you die to reduce the size of your estate
  • Shield your assets in an irrevocable or bypass trust
  • Give away part of your estate as gifts to loved ones when you’re alive
  • Move to a state without estate or inheritance tax
  • Give away property or assets to qualifying nonprofit charities

Mistakes to Avoid

Simple estate planning mistakes can result in heated turmoil and financial strife among family members after you die.

One common mistake is not updating beneficiary designations on retirement accounts, annuities and life insurance policies.

Whoever you named as a beneficiary on these documents overrides your will. People often forget to update their beneficiary designations over time, which can cause cash to pass to an ex-spouse, a deceased person, or other unintended heir.

Likewise, failing to update the language in your will or powers of attorney can create issues. Make sure to review these documents after major life events, such as a birth, death, divorce, or marriage. Your plan will also likely need to be revised if you move to a new state.

If you make changes to your will, go to your attorney to finalize them. Don’t make them yourself by writing on your will or typing up a new one on your own. Doing so may invalidate the entire document.

Finally, be careful if you create a revocable trust, also known as a living trust. People often use this document to help assets avoid probate.

However, a living trust must be funded, meaning the legal title to certain assets needs to be transferred to the trust before you die.

Real estate deeds, automobile registrations and financial accounts must all be updated to reflect that the trust is now the owner.

If these steps are not taken, your assets won’t avoid probate and you’ll effectively waste money on an empty trust document.

Last Modified: July 22, 2022

9 Cited Research Articles

  1. Internal Revenue Service. (2020, July 15). Estate Tax. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
  2. USA.gov. (2020, July 8). Family Legal Issues. Retrieved from https://www.usa.gov/family-legal
  3. O’Brien, S. (2020, June 1). Here’s what you need to know about creating a will. Retrieved from https://www.cnbc.com/2020/02/18/create-an-estate-plan-now-to-take-advantage-of-big-tax-exemption.html
  4. Polyak, I. (2020, February 18). It’s time to create an estate plan to take advantage of the big tax exemption. Retrieved from https://www.cnbc.com/2020/02/18/create-an-estate-plan-now-to-take-advantage-of-big-tax-exemption.html
  5. Caring.com. (2020). 2020 Estate Planning and Wills Study. Retrieved from https://www.caring.com/caregivers/estate-planning/wills-survey/
  6. Carlson, B. (2018, December 2). 7 Reasons It's Time To Update Your Estate Plan. Retrieved from https://www.forbes.com/sites/bobcarlson/2018/12/02/7-reasons-its-time-to-update-your-estate-plan/#27cbfd505ebf
  7. Civics 101: A Podcast. (2019, May 14). Episode: Life Stages – Death. Retrieved from https://www.civics101podcast.org/civics-101-episodes/death
  8. Carlson, B. (2018, April 20). Avoiding 7 Deadly Estate Planning Mistakes. Retrieved from https://www.forbes.com/sites/bobcarlson/2018/04/20/avoiding-7-deadly-estate-planning-mistakes/#774a0a226160
  9. American Bar Association. (n.d.). Do It Yourself Estate Planning. Retrieved from https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/diy_estate_planning/